Bryan Caplan  

Words of Wisdom on Signaling

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Oreopoulos and Salvanes's recent piece in the JEP begins with ample concessions to the signaling model of education:
One issue is that schooling may help develop skills or it may help signal skills that individuals already have. If those with more schooling also have more inherent abilities (perhaps because schooling for them is easier or more enjoyable), employers can use schooling to predict better candidates. This is especially helpful when desirable worker attributes, like perseverance, discipline, and time management, are not easily observed. The distinction matters because, with the signaling story, the private returns to individuals overestimate the total economic gains (perhaps massively so), whereas in the case where schooling develops skills, the private gains are probably a lower bound (due to externalities).

It is very difficult to disentangle the extent to which returns to schooling are driven more by signaling or skill development mechanisms because both theories generate very similar empirical predictions. Our view of literature is that there is evidence of both (for example, Arcidiacono, Bayer, and Hizmo, 2008).
O&P then make the most thought-provoking point against signaling I've seen in a long while:
That said, causal evidence of nonpecuniary returns to schooling tends to support the skill development theory more than it does signaling.  According to the signaling theory, exogenous increases to schooling would affect a person's ranking, which would matter only to employers (or possibly potential spouses), but it should not affect individual decisions such as whether to smoke, vote, spank, or "live for today." If schooling affects these decisions, it likely plays more than just a signaling role.
This distinction between "causal effects of education on the way other people treat you" and "causal effects of education on how you behave and what you believe" is valuable.  But every reasonable proponent of the signaling model admits that schooling has some effect on skill development.  So when you look at the effect of education on individual behavior, you have to ask yourself, "Is the effect bigger than expected given my estimate of the skill development/signaling breakdown?" 

If the estimated effect of education on individual behavior is bigger than you expected, then O&S are right; it's time to put less stock in the signaling model.  But if the estimated effect of education on individual behavior is smaller than you expected, the opposite is true.  And if you want to guard yourself against hindsight bias, you should write down your expectations before you read the article.
  

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COMMENTS (10 to date)
rpl writes:

How do decisions on whether to "smoke, vote, spank, or 'live for today'" have anything to do with skill development? These sound like the sort of thing that reflect how a person is socialized, rather than what skills they have developed. So, what O&P are saying is that people who go to college develop attitudes and opinions similar to other people who go to college. That's hardly surprising, and completely orthogonal to the question of what sort of skills they learn (or don't learn) while they're there.

ziel writes:

Right - socialization, i.e. learning how to behave like a college graduate and not a blue-collar 'prole', is an important aspect of going to college.

But again, it could be that for the vast majority of college attendees they were already like that - you can spot it in high school, the ones who have blue-collar attitudes and those who have a collegiate demeanor.

stephen writes:

The individual decisions listed mostly play a signaling role themselves, and they can be learned after college. Plus, its a bit of a bait and switch to talk about non-skills learned in order to conclude that skills are being learned.

The Engineer writes:

Wait. I am confused. How do you know that the "good behaviors" are not also correlated with whatever is being signaled?

It seems to me that there are a number of good behaviors (let's call it "Good Future Time Orientation"), of which getting a good education is one. So how do you know the good behaviors are being caused by schooling, and not, say, IQ.

stephen writes:

Okay, lets say I am an "at-risk-youth" and I go to college, exogenously, for a non-STEM major. As a result I can now get past the initial HR-diploma-credential hurdle, and signal to the hiring manager that I am a "college man". Now I am surrounded by a bunch of "educated" people(mostly endogenous), who value things like not smoking, voting, not shaking babies, and "being yourself". So I start to value those things too.

Question: is this evidence that I learned a skill in school?

ajb writes:

@stephen

If learning those behaviors makes you productive for firms (e.g. stops you from disrupting workgroups or makes you a better salesman or makes it easier for others to communicate with you) the answer is a resounding YES.

It is as much of a skill as solving differential equations. In many companies, those traits are much more useful than programming or learning how to repair machines.

adam writes:

[Comment removed pending confirmation of email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

stephen writes:

ajb

The personal values/decisions listed "...such as whether to smoke, vote, spank, or "live for today."", have nothing to do with workplace productivity.

It is also not clear weather these things (as well as the behaviors you listed) are learned in school, or once someone gets into the workplace. Most college undergrads are pretty obnoxious, self entitled human beings.

Misaki writes:

[Comments removed pending confirmation of email address. Email the webmaster@econlib.org to request restoring your comments. A valid email address is required to post comments on EconLog.--Econlib Ed.]

The Causal Observer featured this post in its #DailyCogency section on 7/13/2011. http://causalobserver.com/?p=41

[shortened url revised to full url.--Econlib Ed.]

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